Cash Pooling – cracking the liquidity puzzle

A trend for many corporate treasuries has been to increase their cash reserves to hedge against future economic and political uncertainty. This allows them to ensure they have enough cash for day-to-day operations but also puts them in a good place to deliver future growth.

An Investec commissioned survey found that 58% of corporates increased their cash reserves over the course of the pandemic. With global economic uncertainty increasing this trend is likely to accelerate. 

This is one more reason why the tools for managing liquidity continue to gain importance for corporate treasuries. On the face of it, it may seem an easy task to manage cash, but the reality is altogether different. Corporates typically deal with multiple banks, multiple accounts, multiple currencies, across multiple countries. The quantity of data is often large and supplying just the correct amount of liquidity across various parts of the organisation is a major task. Centralising the control and supply of cash is helped by banks providing consolidating tools, chief among which are Pooling and Sweeping products. A survey conducted by The Global Treasurer in partnership with Tietoevry in 2021 examined the use of the more common pooling structures that corporates expect their banks to provide. 

A cash pooling structure enables the corporate to group funds centrally and is a cost- and time-saving way of handling cash balances and optimise the use of the funds. What pooling method can be used is often determined by local country regulations and tax regimes. So, for example while Notional Pooling is acceptable and widely used in the U.K. it may not be permitted (due to regulations) in other countries where a corporate may operate. So it might be that a corporate needs to use different pooling methods depending on where they are located. Furthermore, cultural preferences may impact the choice as the level of centralization differs across corporations. According to our survey, 1 in 2 multi-national corporations indeed apply two or more pooling methods.

While the number of pooling options represents choice for corporates, it means that banks need to ensure they have the infrastructure to support the different methods. This becomes even more complicated for banks whose clients operate in multiple countries. The requirements may include the possibility of combining different methods such as notional pooling and sweeping together in one structure. In addition, corporate clients may need to connect a pool with accounts held with other banks, choose from different interest calculation models, or build several account tiers to cater for their treasury structure.

Given the elements of having to provide multiple structures and permutations of those structures across multiple countries, current segregated and often local systems will not serve this purpose for the bank. Rather than developing cash pooling from scratch or sourcing solutions from different providers, it is more cost effective for banks to partner with one service provider who can deliver all the pooling models their clients are requesting.

Tietoevry has been at the forefront of cash management development for over thirty years and has created a global platform approach to cater for various cash management methods within a single system. Such a modular approach enables banks to extend bespoke offerings to their corporate customer base regardless of geography, regulation, or cultural preference.